From MSN Money
10 bad habits that lead to debt disaster
Bad Habit No. 1: Misusing balance transfers
Transferring balances on high-interest cards to lower-rate cards can be an
effective technique, but it's easy to make it a good idea gone wrong.
Transfer a balance onto a card with a low introductory rate and you can
potentially save money on interest if you refrain from charging on it and
focus on paying off the balance before that introductory rate expires. But
most people continue to charge on the new card and wind up with more debt
once the teaser rate expires, says Cunningham. In fact, new purchases may
pull an altogether different interest rate. Read the fine print very
carefully, and only attempt the balance-transfer maneuver if you can control
your spending on the new -- and old -- card.
Try this: If you can't refrain from charging, balance transfers won't get
you out of debt. If you're really in the hole, consider getting a part-time
job and dedicating your earnings to your debt load. If that's not possible,
go back to your budget and cut back on unnecessary expenses such as
restaurant outings and cell phone extras. Put the money you save toward
paying off your balances. Pay for new purchases with cash or a debit card.
Bad Habit No. 2: Not checking credit reports -- you can't change them
Wrong. If you have credit cards, pull your credit report at least once a
year and check it for errors. Purging your record of inaccuracies can be
crucial for getting better interest rates, landing the job you desire and
stopping an identity thief from ruining your credit rating. Your credit
report also affects your credit score, which determines how high your
interest rates will be on future loans. Dispute anything you think should
not be there. The Fair Credit Reporting Act allows for the correction or
deletion of inaccurate, outdated or unverifiable information, provided that
a reinvestigation into the disputed data sides in your favor. Unfortunately,
negative but truthful data must stay put. A Chapter 7 bankruptcy filing, for
instance, will remain on your credit report for 10 years, a Chapter 13 for
Try this: You can request one free copy "https://www.annualcreditreport.com/cra/index.jsp"
from each of the big three credit reporting bureaus, Experian, TransUnion
and Equifax, every year. Why bother? Errors on your report, such as a
payment marked late that came in on time, could raise your interest rates,
lower your credit score and affect your ability to obtain credit in the
If you do find a mistake, send a "http://www.bankrate.com/msn/news/forms/credit-report-error-fix.asp"
to each of the credit bureaus that show the error. "http://www.experian.com/"
allows you to dispute errors online, as do "http://www.transunion.com/" and
Don't bother with so-called credit-repair clinics that aim to charge you
hundreds or thousands to fix your credit record. "Anything you can legally
do to repair it you can legally do for free," says Cunningham. Of course, if
you're not willing or dedicated enough to write those letters and follow up
with the credit-reporting agencies, paying someone else to do it for you may
not be such a bad idea. Better to have someone dispute the errors rather
than no one. But be extremely careful in selecting such an organization --
try to get referrals and seek out others who have been satisfied with the
Bad Habit No. 3: Failing to alert creditors about a financial hardship
You heard the rumor: Layoffs are coming to a department near you next
Don't wait until it happens to worry about how to pay your bills. Do some
damage control right away.
Try this: "The best time to negotiate is before the problem spirals
downhill," says Cunningham. Call the credit card company and explain the
problem you're about to have. Ask if they could temporarily lower your
interest rate or extend your payment deadline. Some issuers have in-house
help programs that provide such short-term services to customers.
Bad Habit No. 4: Thinking of 'budget' as a dirty word
The word may call to mind tedious self-trickery meant for those with low
incomes, but everyone could benefit from deciding on certain amounts for
spending, and sticking to the amount no matter what. It also makes sense to
budget for known future expenses, such as quarterly insurance premiums,
college textbooks and rent. Not saving up in advance means you'll have to
charge expenses or cut into funds set aside for necessities. Budget these
fixed costs while you can handle small financial pinches.
Try this: To find out what's draining your finances, keep track of where
your money goes for a month. Use a spreadsheet, financial software or a pen
and paper and categorize your expenses. Doing this will reveal whether
you're spending too much on expenses you could trim, such as restaurant
outings and gas. Then you can consider cooking at home more often or
consolidating driving trips. Cut back as necessary without cutting out
expenses important to you. Cunningham suggests that if you enjoy watching
TV, but don't tune in to a majority of the 300-plus channels you have,
consider cutting back on your cable package instead of cutting out TV
For a detailed household spending plan, try this "http://www.bankrate.com/msn/news/debt/debtguide2004/home-budget-tool1.asp".
Or, get help creating a budget with a "http://www.bankrate.com/msn/calc/Worksheet.asp".
(For a really simple budget, try the "http://articles.moneycentral.msn.com/SavingandDebt/LearnToBudget/ASimplerWayToSaveThe60Solution.aspx".)
Plan for future costs by figuring out the total amount you'll owe and divide
by the number of months you have until that day, says Cunningham. If you
have money due next month, divide by the number of weeks you have and save
that amount every week.
Bad Habit No. 5: Using retail store credit cards to make use of discounts
Chances are, that card carries a high interest rate you'll be forced to
deal with if you don't pay off your balance each month.
Try this: If you must charge your purchase, use your general-purpose credit
card, says Cunningham. If you can't pay off the balance, at least you'll pay
a lower interest rate. Limit the total number of credit cards you have to
just two, if you can: one you can pay off each month and one with a low
interest rate for those large purchases you'll pay back over time.
Bad Habit No. 6: Procrastinating on creating an emergency fund
Learn to save for financial emergencies. Even if you feel robust and
invincible, a single emergency room trip or car accident could force you to
put large balances on credit cards, causing interest to accrue and more debt
to pile up. "That rainy day will happen," Cunningham says. "It's not a
matter of if, it's a matter of when." If your tire goes flat and you can't
pay upfront for the replacement, for instance, you're stuck with charging it
or reducing funds earmarked for necessities. That's where the emergency fund
Try this: Maintain an emergency fund of at least three to six months' worth
of living expenses, and keep your insurance policies up to date. Work toward
that goal by socking away 10% of your take-home pay each month in a liquid
savings account, says Cunningham. If you receive a raise or bonus, add that
money to savings. Since you're not used to the extra cash flow, you won't
Bad Habit No. 7: Paying bills in no particular order
While the order may not matter if you can pay all the balances, it will
matter if you fall short one month. Say you pay off the balances on your
credit cards first, then find you can't make the minimum on your house
payment or monthly rent. You've put the roof over your head at risk.
Try this: "Pay for living expenses first," says Cunningham. After the house
or rent payment, necessities such as utilities, groceries and medical care
should top the priority list. Next comes the car payment -- you want to
avoid repossession, obviously. On down the line, secured loans and co-signed
debts follow in importance, then unsecured loans and credit cards. "Ideally,
everyone can get paid, but if a choice has to be made, paying in this order
will do a better job of keeping the home life stable."
Since bills often aren't due in this order, you'll need to work out a
payment schedule and set aside money from each paycheck. See No. 9.
Bad Habit No. 8: Charging purchases instead of paying in cash or with a
How many times have you charged services or merchandise when you had the
money to pay with cash or debit? Insignificant purchases of $20 and $30 made
several times over can quickly add up, particularly if you already carry a
balance. Balances you can't pay off each month mean paying interest charges
and, subsequently, more money for items you could have bought outright,
Try this: Make a habit of paying for purchases under $50 with cash, debit or
check. Knowing that the money has to clear the bank sooner could help curb
your spending habits. Just be sure to check your balance regularly to ensure
that you have enough funds.
Bad Habit No. 9: Making credit payments late
After all, it's only a $39 late fee. Besides wasting money you could've put
toward the balance, a payment that arrives at least 30 days past due can
throw your account into default and triple your interest rate. Plus, other
creditors may start charging you a default interest rate as well, thanks to
a universal default clause buried in your contract.
"Creditors are constantly reviewing your credit activity, and if they see
you falling behind with one creditor, even if you have a perfect payment
history with them, they can raise your interest rate," Cunningham says.
Try this: On a calendar, mark upcoming paydays and payments that should come
out of that paycheck, she says. If you're mailing payments, send them seven
to 10 business days in advance. Better yet, sign up for online bill pay.
Just check that the address on file and the address on the statement match,
or the payment might not arrive on time. If you're still late, call the
creditor, explain the situation and ask them to forgive the late fee. Check
your credit report and be sure the information shows up correctly.
Bad Habit No. 10: Making the minimum payment only
Paying the minimum is better than paying nothing, but it doesn't do much
to pay off most balances and forces you to keep paying interest. By paying
interest on interest, you lose any savings from buying a dress on sale,
Try this: If you can afford to pay more or in full, go ahead and pay as much
of the balance as you can. You never know when you're going to have a tough
month. Pay in full every month and you can avoid interest charges
Or, if paying more than the minimum proves difficult, consider working an
extra part-time job or decreasing your expenses -- or both, says Cunningham.
Put all of your extra earnings toward the debt. Use the "http://www.bankrate.com/msn/calc/minpayment.asp"